All posts by Fit Investment Ideas

Making money is about great ideas. This is what this blog is all about.

CEO Bob mao report for the ERII shareholder meeting 16 July, 2020

As we begin our fifth month of the Coronavirus pandemic in the US, I remain confident in Energy Recovery. I proactively positioned the company to be able to operate in our new normal, and we continue to operate safely and effectively at full manufacturing capacity as of today. We are taking care of our customers, fulfilling sales orders and protecting the lives, and livelihoods, of our employees. We remain financially strong, with a solid balance sheet and plenty of cash reserves.

To date, the desalination industry has remained strong and long-term trends remain intact. We are in the midst of a secular shift in desalination demand as water needs grow globally due to climate change, increased population growth and industrialization. This demand comes down to the basic difference between wants and needs – people need water even during an economic crisis. Desalination is a key answer to these acute water needs in countries around the world, and we are proud to play an important part in providing clean, fresh water to millions of people.

In addition, the ongoing technology shift from thermal to reverse osmosis desalination continues, providing a strong fundamental catalyst for growth in the R/O industry with a potential market of roughly half a billion dollars for Energy Recovery.

In short, desalination is not going away, and despite some uncertainty as we look at the next 12-18 months, we still believe that the long-term growth we have communicated in past quarters will remain in place. The desalination industry is in a fundamentally strong position, and we are ready to help serve this market as it continues to grow and meet the demand of people all over the world.

And now I will turn to Oil and Gas.
Let me be clear, the VorTeq is in a fundamentally stronger position than it was when I became interim CEO eight months ago. We have solved every major technical challenge we have faced. At our field test in June, Liberty witnessed firsthand that the technology works and that we can successfully integrate the VorTeq with Liberty’s software, equipment and frac crews. Liberty also saw that the VorTeq will not impede frac operations nor cause a failure to a job – satisfying customer safety and quality concerns is a critical milestone to getting to a live well frac.

This opinion was echoed by Liberty’s President, Ron Gusek, when he stated, “We are excited about the results we’ve seen in Texas and we are working with Energy Recovery and our customers to move the VorTeq to a live well. During the most recent field tests we have been able to better appreciate the potential of the VorTeq and its ability to be integrated into the existing frac spreads.”

We all recognize that the VorTeq path has been a tough one, and it has taken longer and cost more than originally planned. One thing that has not changed, however, is the need for frac operators to protect their valuable high-pressure pumps. Incremental improvements have been made in pumping technology since 2015, but the real solution is to allow pumps to do what pumps do best – pressurize and pump water, not sand. We continue to believe the VorTeq is this solution.

With this belief firmly in mind, we approached our former licensing partner to establish strategic and logistical alignment as we looked towards commercialization. However, as reported in a recent press release and discussed during our last investor call, ERI and Schlumberger agreed to an amicable termination of the exclusive licensing agreement due to different strategic imperatives. To be frank, this termination was the best possible result for ERI given the recent upheavals in the oil market and the changing landscape in North American frac, including our former partners’ reduced presence in that market. We now have the freedom to approach the entire pressure pumping market, and to work with enthusiastic partners like Liberty, and others, to realize the potential benefits of the VorTeq for the shale frac market. While exiting this contract may seem to add some uncertainty as to how the VorTeq’s potential will be monetized, there were obvious limitations in remaining within an agreement that provided little potential for ERI. We are comfortable with the path chosen, and confident in our ability to execute provided the final hurdles to commercialization are resolved.

On the call on June 30th, I discussed two critical advancements we have made in the VorTeq. First, we processed sand concentrations more than double that originally envisioned by the system. I cannot overstate the importance of this accomplishment. The higher the sand concentration, the fewer pressure exchangers that are needed on a frac site, and the lower the cost to ERI and our customers.

Second, the VorTeq skid model we tested with Liberty and have since posted to our website will be our production model 1.0. It is an elegant, simple single PX skid solution which takes advantage of these higher sand concentrations. This more compact solution is less costly to produce with reduced lead times and has a smaller footprint and is therefore less intrusive to frac operations. In addition, this model allows operators the freedom to scale the VorTeq up or down to configure their jobs depending on their needed flow rates, pressures, and overall job configuration.

In short, the technology is advancing, and we are confident where we stand today. That is not to say that risks do not remain. Before we can commercialize, we must pass three key hurdles. First, we must successfully frac 2-3 live wells to ensure the VorTeq is operating as needed repeatedly. Second, we must reconfirm, with live well data, the value proposition for our customers.

And finally, we must increase the life of the PX cartridges themselves to ensure that the product is creating value for Energy Recovery. At the end of the day, if we cannot clear each of these three hurdles, we will not proceed with commercialization and will stop investing in this effort.

At our earnings call in two weeks, we will discuss these remaining challenges in more detail. Our goal is to provide shareholders the ability to understand our progress, and the logic of future decisions on the VorTeq we will make in the coming months.
Incubation

The lessons we have learned from VorTeq in working with such high pressures and harsh fluids will serve us well going forward. We have challenged the limits of the PX and established the sandbox in which we will focus future development and applications. This versatile technology has proven it can operate under pressures from 1,000 PSI to 10,000 or more, and can handle liquids as mild as sea water to those as harsh as the fluids in hydraulic fracing. We have identified potential industrial applications in a variety of industries, including but not limited to water or oil & gas, simply by modestly increasing the lower end of our operating pressures on the PX. We are not a water company nor are we an oil & gas company – we are a PX company. We are the pressure exchanger experts and that expertise will drive the future growth of our company.

As I have said before, we will approach growth in a disciplined way. This includes taking a rigorous approach to new product introduction that promotes efficient spend and close alignment between functional business areas. Our focus is to deliver commercial results quickly or, alternatively, stop investing if market or technological conditions adversely change.

Growth also includes discipline around our operations. To this end, I am pleased to share that we will release Energy Recovery’s first environmental, social, and governance report later this year. As we grow along with the install base of our pressure exchangers, we felt now was an appropriate time to launch our first ESG report. While our business has always been aligned with sustainability issues such as addressing global water scarcity, our ESG report reflects our commitment to continuous improvement in this area. We are early in our ESG journey and look forward to your input once our report is public.

Thank you.

False alarm at GE – buying opportunity for quick gain

Yesterday, after the report by the Medoff whistleblower on GE, the stock went down by 10%. Since then many people that I respect dismissed the report. Namely short seller John Hempton, or Stanley Drackenmiller. The GE CEO bought 2 mil USD in GE shares, after buying almost 3 miln USD earlier this week. I bought a position before market opened on 8/16/19 at 8.25. It is a short term bet, that the GE stock will come back where it was before the report

The largest Slovenian bank, with DY of 11% and RoE of 14% is trading just at 0.7 P/B.

NLB is one of the most interesting stories in current markets. IPO was placed 6 months ago, largely unknown to most investors. See my write up on the opportunity

https://seekingalpha.com/article/4272036-just-privatized-largest-slovenian-bank-nlb-0_7-p-b

 

Just published research by InterCapital the largest local broker. Quite bullish

 

NLB Group – More Than a Dividend Story”

Our initiation research for the NLB Group values the company at EUR 80.0 per share, giving it a STRONG BUY recommendation with potential upside of 38.4%. This translates into forward 2019 P/E of 8.35 and a P/B of 0.96. There are several key reasons behind our recommendation:

A strong dividend play: for the years 2019–2023, the company management is targeting a high payout ratio of 70%. Such an attractive dividend policy would translate into an estimated average dividend yield of 11.9% over the next five-year period (based on the current share price). Besides that, NLB Group is operating with a capital adequacy ratio (CAR) of 16.57% (Q1 2019) and is targeting a CAR of around 16.25%, indicating that the company has excess capital of EUR 160m (EUR 132m based on the target CAR). Any excess capital could be used for growth, potential M&A, or dividend payment.

Growth potential in the SEE region: The Group is expected to achieve solid growth in almost all their markets and especially in the SEE region (average growth of gross loans of 4.4% on the Group level until 2023E not assuming any acquisitions). We expect that the SEE region will over 5-year period account for a higher portion of the Groups total assets and gross loans (around 40% of total gross loans compared to current 38%). We expect that SEE markets will continue to be more profitable compared to Slovenia which should in turn help to support a solid development of the bottom line.

Undervalued compared to peers: At the current share price, the company is traded at P/E of 6.03 and a P/B of 0.67 while regional peers are traded at 8.49 and 0.98, respectively. Profitability wise, last year NLB recorded a ROE of 11.8% which is 20 bps above the peer group. We expect that the company will continue to achieve similar ROE over the next 5 years which will in turn allow it to continue with the aforementioned dividend payout. As a comparison, NLB’s last dividend yield of 11.5% is quite higher than the peer median of 7.6%.

Corporate governance and credit rating: NLB group is one of the only Slovenian stocks rated as investment grade by S&P and Moody’s. Since 2013, the company has been observing a steady growth and improvement of almost all major segments of the P&L, BS and corporate governance. NLB Group’s NPL ratio went from 28.2% in 2012 (NPLs of EUR 3.7bn) to 6.9% in 2018 (NPLs of EUR 622.3m). ROAE went from 4.8% in 2014, to 11.8% in 2018. Cost of risk went from 171bps in 2014 to -43bps in 2018. Consequently, NLB is rated as BBB- by S&P and Baa2 by Moody’s (investment grade). Lastly, we believe that being listed on LSEG and LJSE added to further improvement of corporate governance which provides us with a comfort that the company is on a right path to deliver the planned growth and dividend play story.

Safe Heaven in Current Markets

Nova Ljubjanska Banka
  • It is the largest Slovenian bank.
  • In 2013 taken over by the Slovenian Government, fully restructured and recapitalized
  • IPO closed last week. Launched at 51.5 Euro per share, now trading at 56.6.
  • Just spoke to Wood analyst (I can get you his contact details). He called the stock “Safety Heaven in current markets”. The reason is it is still very cheap. 
  • NLB now trades at 0.7 P/B. With RoE of 18%  and Div Yield at 12% it should trade at least around 1.1 P/B. That is what Wood analyst thinks. The reason for this is simple – there is no research coverage, yet. The syndicate members (JP Morgan, Citigroup, Deutsche and Wood) are in blackout period (until 20/12) – they can issue research only after that date. There are three catalysts in pipeline which should help to rerate the stock:

    • There is a CEE Equities conference early December organized by local broker Wood and Co in Prague. 150 CEE oriented investors are attending and NBL is one of the presented companies. Last year I saw 30% price increase on similar situations during the conference
    • The research reports will be published on 20/12
The prospectus and other documents can be found here: https://www.nlb.si/public-offering-of-shares-prospectus
 Peers ratios for comparison
peers
NLB Valuation based on Peers
Per share data
EUR
NAV 30/6/18 89,85
Dividend paid 13,5
Earnings 2H18 5
NAV E2018 81,35
Share price 56,5
Price to book 0,69
Net profit 2018E 10
Yield 18%
payout ratio 70%
Dividend yield 12%
P/E 2018E 5,7
RoE 2018 14%
Target P/BV Price per share
0,9 73
1 81
1,1 90
1,2 98
1,3 106
1,4 114
1,5 122

Trump will fight strong USD.

Who is the best to predict USD movements? I like Gundlach´s view on this:

“It seems”, Jeff continued, “that the U.S. president wants a weaker dollar.” There’s another characteristically insightful observation for you. After all, there’s no way you could have surmised that without Jeff’s help…

Donald J. Trump
Donald J. Trump
@realDonaldTrump
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…

Gundlach continued his latest state-the-obvious-a-thon by noting that if the burgeoning crisis in emerging markets worsens, it “could be a global market problem.” He, like everyone else, doesn’t think this is sustainable:

SPXEM

A weaker dollar would help, he added.

Jeff of course addressed his Treasury short squeeze tweet. Specifically, he’s not convinced that 10Y yields will fall to 2.25% (nobody else is either, considering that’s a full 72bps lower than where we are now), but if you’re wondering how we could “get there”, Gundlach has this to offer:

What could get you there is a monumental short squeeze, because the speculative short positioning in the 10-year is off the charts.

By “off the charts”, he just means it’s sitting near a record. It’s not literally “off the charts” because, well, because here’s a chart of the short in the 10Y:

TYShort

(Bloomberg)

He used that “monumental” short squeeze theory to reiterate the threat of a curve inversion, which he said could be the result if that position does in fact get squeezed.

As far as why nobody has been squeezed yet, Jeff has a simple answer:

Because it’s not moving.

Right.

And while he acknowledges that there is no written rule that says yields have to fall just because specs are short, anything that sparks a rally in Treasurys could start tipping dominos or, as Jeff puts it, “if something’s a catalyst to get a rally, you can just imagine the stampede to cover those shorts”.

Yes, “just imagine” that. If a bunch of people are short, and the market moves against them, they might have to cover. Again, penetrating insight.

For what it’s worth, what Jeff (and everyone else) thinks they’re seeing in that short position might not in fact be what they’re actually seeing. We talked about this on Monday evening, citing several recent notes from Deutsche Bank in “What’s Really Going On With That ‘Massive’ Treasury Short?”

In any event, you get the idea. Jeff is still a bit perturbed at U.S. fiscal policy, he’s sticking with the short squeeze call on Treasurys, he thinks that prospective squeeze could take 10Y yields all the way down to 2.25% on the way to inverting the curve and he thinks the dollar might have peaked for the time being.

all the above is from:

https://heisenbergreport.com/2018/09/11/jeff-gundlach-slams-u-s-fiscal-policy-in-miracle-grow-webcast-says-monumental-treasury-short-squeeze-possible/

 

My no brainer trade is working out

Two weeks ago I published a no brainer trade. Buying Saudi in anticipation of its inclusion into MSCI. It was announced today. Expect significant re-rating.

MSCI adds Saudi Arabia, in line with consensus, acknowledging impressive reforms; Kuwait is next in line
MSCI announced the inclusion of Saudi Arabia in the MSCI Emerging Markets Index effective June 2019, representing a weight of approximately 2.6% of the index with 32 securities. This will follow a two
step inclusion process, the first of which will coincide with the May 2019 SemiAnnual Index Review, while the second will be in August 2019 Quarterly Index Review. MSCI also announced the reclassification of the MSCI Argentina Index from Frontier Markets to Emerging Markets status. In addition, MSCI announced that it will include the MSCI Kuwait Index in its 2019 Annual Market Classification Review for a potential reclassification from Frontier Markets to Emerging Markets status.

This marks a strong acknowledgement of the reforms undertaken by the Saudi government, which included lower restrictions on international investors and the introduction of short-selling and T+2 settlement cycles. The decision was anticipated since the beginning of the year as MSCI praised Saudi’s efforts to introduce capital market reforms that aimed at opening the local equity market to international institutional investors. We recall that index provider FTSE Russell upgraded Saudi to Emerging Market status in March 2018.

Saudi officials expects USD40bn in inflows
The CEO of Saudi bourse expects minimum foreign inflows of USD10bn from passive funds with up to USD40bn over the next year from the inclusion, and he added during an interview with Bloomberg, that Tadawul is aiming to increase the foreign participation in the market from a current 5% to 20-25% in the next two years. We do not only see the inclusion as increasing foreign presence in the market and improving liquidity, but also as enhancing the quality of the flow entering the market, which we believe will be more geared towards long-term institutional investors that will provide a fundamental growth in the Saudi market. This will be magnified by the impressive reform story the country is providing amidst EMs. Aramco IPO will be another key trigger for the market, with a potential USD50bn of assets into the market. Saudi is the third GCC country to be granted MSCI Emerging Market status, as UAE (0.4%, upon inclusion) and Qatar (0.45%) were included in 2013. According to market reports, UAE and Qatar weights are currently much higher than when they were included in 2013.

No brainer trade

I bought 8% weighting of my portfolio in KSA – ishares ETF that tracks Saudi Arabia. MSCI announced that it would include SA in their EM index. SA would become the largest country in the EM space. Each time this happened in the past, there was a 50% run. No brainer trade.

 

Foreigners ‘to inject billions’ into Saudi on MSCI inclusion

Kingdom could become ninth largest country on index if it wins EM status

Saudi Arabia could become the ninth largest country on the MSCI Emerging Market index if it wins inclusion in 2019, attracting billions of dollars of inflows, according to analysts.

On Wednesday, index provider MSCI announced the addition of Saudi Arabia to the 2018 annual review cycle for potential inclusion in the MSCI Emerging Markets index the following year.

The Tadawul stock exchange jumped 5.5 percent on the announcement – although analysts said this could also have been due to news of Mohammed Bin Salman’s promotion to Crown Prince.

Analysts said the MSCI news was a further positive development for the country but warned that Saudi Arabia has more work to do to modernise its equity market.

A paper from Capital Economics said a listing on the MSCI Emerging Market index would help the kingdom to attract potential inflows of more than $38 billion.

“If upgraded, MSCI has estimated that Saudi Arabia would have a weight of around 2.4 percent,” it said. “Given that around $1.6trn of assets under management track the MSCI EM Index, this could translate into inflows of more than $38bn – equal to around 6 percent of [Saudi Arabia’s] GDP.

“To put this into perspective, inflows on this scale would have funded the current account deficit last year one-and-a-half times over.”

The paper noted that foreign ownership of Saudi equities is currently low at 4 percent, and said an emerging market listing would significantly boost this percentage.

Daniel Salter, head of equity strategy and head of research, Eurasia, at Renaissance Capital, said the kingdom could become the ninth largest country in the index if emerging market status was achieved.

“Using the provisional list of constituents and latest prices, we estimate that Saudi Arabia could have a weight of 2.5 percent in MSCI EM, making it the ninth-largest country in the index and the third largest in EMEA [Europe, Middle East and Africa],” he said.

Fawad Tariq Khan, general manager of SHUAA Capital, said: “Saudi’s inclusion in the MSCI emerging markets stock index will be a welcome boost for capital markets in the region.

“The kingdom’s potential upgrade to emerging market status in 2019 will give access to more international investors and bring greater liquidity to the region’s largest market.

“This will benefit the local banks and financial services’ industry in addition to supporting the kingdom’s 2030 vision to diversify the economy away from oil. It’s a welcome move for Saudi and will have a positive impact for the wider Gulf region.”

Last year, the Tadawul did not make the review list despite having announced a string of reforms intended to achieve emerging market (EM) status.

MSCI said at the time it would “continue to monitor the positive evolution in the opening of the Saudi Arabian equity market for international institutional investors”.

Renaissance Capital’s Salter said: “MSCI’s decision will rest on whether foreign investors feel the current level of opening is sufficient, given the 49 percent foreign ownership limits and investor qualification requirements (which have admittedly become less strict).

“In addition, some of the market framework changes, such as stock lending and short-selling, have yet to be tested.”